Roy Davidson, 1 March 2018

FPH 010318

FPH designs, manufactures and markets respiratory and acute care (RAC) products used in ventilation and oxygen therapy, and products used to treat obstructive sleep apnea (OSA). FPH has developed specialised expertise in heated humidification and warming that forms the basis of its strong market position and product differentiation. Global sales represent almost all of FPH’s revenue. Manufacturing is based at purpose built facilities in Auckland and in Mexico.

Over time, FPH has generated premium returns on capital while increasing its capital base. FPH’s high-value niche products enjoy impressive positions in various international medical device markets, facilitating high levels of profitability and impressive returns on investment. FPH has generated attractive growth opportunities by expanding into new geographies and developing additional products, leveraging its technology advantage.

FPH is the clear global leader in humidification for patients requiring invasive ventilation. With this market maturing, FPH has developed new products further down the care scale in non-invasive ventilation, oxygen therapy and the chronic obstructive pulmonary disease (COPD), utilising its existing expertise in heat and humidity control. The addressable patient groups in these new applications are far larger than for FPH’s invasive ventilation products. FPH’s high-flow oxygen nasal interface, the Optiflow nasal cannula, combined with its heated humidification, are gaining traction in a number of early-adopter hospitals, where it has been shown to reduce hospital stays materially, leading to significant cost savings. Hospitals have been slow to change practises to date, but the value equation for the change has been demonstrated and FPH is excellently placed for industry-wide adoption of the treatment.

FPH's constant currency sales growth slowed to 8% in 1H18 (from 11% in the previous period) and underlying NPAT growth slowed to 13% (from 24%). While FPH slightly increased its full year guidance for FY18, this was largely driven by the expectation of lower litigation costs rather than operational improvements. While growth rates are still solid, over the past year FPH's forward P/E multiple has expanded from around 25x to 40x, its highest premium to its ASX peer group in over five years. FPH remains a high quality company with god growth prospects, however, we may see a period of consolidation in the near term to allow earnings growth to catch up with the share price.

FPH is one of the highest quality companies listed on the NZX. It has leading products and positions in the markets in which it operates, a proven track record, and large opportunities, particularly with its optiflow product. As the company generates the vast majority of sales overseas, it is a key exposure to a weaker NZ dollar.

Risks to FPH include: 1) litigation risk, 2) technological change, 3) increased competition.